Japan's gross domestic product for the October-December quarter posted a slight 0.2 percent rebound on quarter, or an annualized 0.6 percent rise, as eased Covid rules and travel subsidies supported consumption while net exports rose after a one-time surge in service imports caused an unexpected contraction in July-September GDP, Cabinet Office data released Tuesday showed.

The preliminary data came in much weaker than the median economist forecast of 0.5 percent growth (forecasts ranged from 0.2 percent to 0.7 percent), or an annualized 1.9 percent gain (0.7 percent to 3.0 percent). The weakness came largely from a bigger-than-expected reduction in private sector inventories and an anticipated slowdown in public works spending.

The rebound in the fourth quarter followed a contraction by 0.3 percent (revised down from a 0.2 percent drop) on quarter, or an annualized 1.0 percent (revised down from a 0.8 percent fall), in the third quarter, when high import costs for food and energy as well as a jump in service payments to other countries slashed net exports, dampening the effects of resilient business investment and consumer spending.

The Econoday Consensus Divergence Index stood at minus 17, below zero, which indicates the Japanese economy is performing worse than expected. Excluding the impact of inflation, the index was at minus 14.

Japanese policymakers believe the economy needs continued monetary easing and fiscal spending to support gradual recovery and guide inflation to stable 2 percent.

From a year earlier, the economy rose a modest 0.6 percent in October-December, posting the seventh consecutive rise following a 1.5 percent rise in July-September.

The real annualized GDP amount rose to ¥547.52 trillion in the October-December quarter from ¥546.66 trillion in July-September but was lower than the recent high of ¥548.04 trillion hit in April-June 2022. Those figures are above ¥544.50 trillion recorded in the January-March period of 2020, when the GDP grew 0.4 percent on quarter before the outbreak of the pandemic triggered an 8.0 percent slump in the following quarter.

On a calendar year basis, the real GDP rose 1.1 percent to ¥547.52 trillion in 2022 from ¥540.24 trillion in 2021 and was above ¥528.89 trillion in 2022, but it was still lower than ¥552.54 trillion in the pre-pandemic 2019.

Consumer Spending Up on Travel Support, Eased Covid

Private consumption, which accounts for about 55 percent of GDP, rose 0.5 percent on quarter in the fourth quarter, coming in line with the median projection of a 0.5 percent increase (forecasts ranged from 0.3 percent to 0.8 percent gains) and after being unchanged (revised down from a slight 0.1 percent rise) in the third quarter and rising 2.0 percent in the second quarter.

In the absence of strict public health rules for the first time in three years, many households continued spending on domestic travel, using the government's discount program launched in October, while some people were cautious about stepping out as the numbers of coronavirus infections and deaths surged toward yearend in the eighth wave of the pandemic in Japan.

Consumption pushed up the GDP by 0.3 percentage point after making zero contribution to the total domestic output in the previous quarter.

Capex Slips as Expected After Recent Strong Gains

By contrast, business investment in equipment marked its first drop in three quarters in October-December, down 0.5 percent on quarter, which was weaker than the median forecast of a 0.3 percent fall (forecasts ranged from a 0.8 percent drop percent to a 0.7 percent rise), following solid gains of 1.5 percent in July-September and 2.1 percent in April-June.

Capex trimmed the GDP by 0.1 percentage point in the fourth quarter after providing a positive 0.3-point contribution in each of the previous two quarters.

The Bank of Japan's quarterly Tankan business survey released in December indicated solid capex plans for fiscal 2022. Some capex plans are being carried over from fiscal 2021 that ended in March, when the economy was hit by the wintertime spike in Covid cases and supply delays were aggravated by the Ukraine war. Capex is generally supported by demand for automation, government-led digital transformation and emission control.

External Demand Marks Modest Rebound

Net exports of goods and services -- exports minus imports -- made a positive 0.3 percentage point contribution to the total domestic output in the fourth quarter, coming in softer than the median forecast of a positive 0.4 percentage point contribution to total domestic output (forecasts ranged from plus 0.1 to 0.5 points).

In the previous quarter, the key measure of external demand pushed down the GDP by a sharp 0.6 point after raising it by 0.1 point in April-June and lowering it by 0.5 point in January-March.

Japanese exports posted a fifth straight quarterly gain, up 1.4 percent, in October-December, with the pace of increase decelerating from 2.5 percent in July-September. Imports marked their first drop in five quarters, down a slight 0.4 percent, after a 5.5 percent surge in the previous quarter led by service payments.

The number of visitors from other countries has continued to pick up since the government eased its Covid border control rules in October, leading to higher spending by foreign visitors, which is counted as exports.

Growth in Japanese export values lost steam further in December on slowing global demand as China struggles with a renewed spike in Covid infections and deaths, while lower energy markets and the yen's slight rebound also reduced import values, leading to a narrower trade deficit.

Private Inventories Slump, Public Works Drop Smaller Than Expected

Private sector inventories provided a negative 0.5 percentage point contribution to the October-December GDP, compared to the median forecast of a negative 0.2-point contribution (forecasts ranged from a 0.5-point drop to zero), after pushing up the third quarter GDP by 0.1 point. Companies appeared to have used built-up inventories to meet shipment needs.

Public works spending recorded a 0.5 percent drop on the quarter in October-December, smaller than the median forecast of a 0.9 percent decrease (forecasts ranged from a 1.5 percent fall to a 0.6 percent rise), after rising 0.7 percent in July-September and marking its first quarter-on-quarter rise in five quarters, up 0.5 percent, in April-June, when the government implemented projects included in the supplementary budget from the previous 2021 fiscal year.

Public investment trimmed the fourth-quarter total domestic output only slightly (negative 0.0 percentage point) after making zero contribution to the GDP in each of the previous two quarters.

Economy Expected to Continue Growth in Q1

Looking ahead, economic growth in January-March may lose some momentum in the face of slowing global demand following last year's aggressive monetary tightening by some central banks aimed at bringing high inflation back to target. Domestic demand is likely to be supported by consumer spending on goods and services as the economy continues to reopen, but the purchasing power of many households has been reduced by rising costs for daily necessities and falling real wages.

On average, 36 economists polled by the Japan Center for Economic Research from Jan. 27 to Feb. 3 forecast the GDP would grow 1.28 percent at an annualized pace in the first quarter of 2023 and 0.91 percent in the second quarter on the assumption that Q4 GDP grew 2.43 percent, according to the center's ESP Forecast released last week.

Japan's gross domestic product for the October-December quarter is forecast to post a solid 0.5 percent rebound on quarter, or an annualized 1.9 percent rise. The forecasts ranged from 0.2 percent to 0.7 percent, or 0.7 percent to 3.0 percent annualized. Eased Covid rules and travel subsidies likely supported consumption, up 0.5 percent versus a slight 0.1 percent gain in the prior quarter, while net exports are seen pushing up the total output by 0.4 percentage point, after a one-time surge in service imports led external demand to make a negative 0.6-point contribution, causing an unexpected 0.2 percent contraction (annualized 0.8 percent) in the July-September GDP.

Capital investment is expected to show a 0.3 percent pullback after a strong 1.5 percent gain and public works spending is also seen down 0.9 percent after a 0.9 percent rise. Lower private inventories are seen trimming fourth-quarter GDP growth by 0.2 percentage point after adding 0.1 point in the third quarter.

Gross Domestic Product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

Gross domestic product is the all-inclusive measure of economic activity. Investors need to closely track the economy because it usually dictates how investments will perform. Investors in the stock market like to see healthy economic growth because robust business activity translates to higher corporate profits. Bond investors are more highly sensitive to inflation and robust economic activity could potentially pave the road to inflation. By tracking economic data such as GDP, investors will know what the economic backdrop is for these markets and their portfolios.

The GDP report contains a treasure-trove of information which not only paints an image of the overall economy, but tells investors about important trends within the big picture. GDP components such as consumer spending, business and residential investment, and price (inflation) indexes illuminate the economy's undercurrents, which can translate to investment opportunities and guidance in managing a portfolio.